CBI Expanding Oversight Power

The Central Bank of Iran is studying eight new measures to strengthen its supervision over the banking system, CBI’s deputy for supervisory affairs announced on Sunday.   

“The measures include operational risk management (ORM), asset quality review, assessing the profitability of banks and their corporate governance as well as transparency.”

He stressed that by implementing these measures “it is expected that the stability and health of the banking system would improve.”

Farshad Heydari, who has pursued the bank ratings scheme since taking his new job in May, reiterated that new supervisory measures will be introduced by the end of the month to regulate banks. These measures too, he says, will make competition between the banks “logical” and “prevent unhealthy competition.”

In early September, Heydari had announced that the rating process for Iranian banks would commence in late October and lenders will be classified into four groups, namely “without visible risk”, “low-risk”, “average risk” and “high risk”. Later, he said the ratings would not be made public.

The official added that the regulator in a bid to foster healthy competition among lenders, is about to set a cap on the amount of “resources and deposits” banks will be able to absorb.

“By setting a cap on the amount of deposits bank can absorb, the CBI is trying to create a healthy and competitive ambience between the lenders,” Heydari was quoted as saying by banker.ir.

As part of their unending pursuit to lure savings, Iranian banks have for long been caught up in a race to provide bigger incentives to customers. Offering high returns on deposits has been the single most common tactic employed by banks in recent decades. The rivalry is further complicated by the activities of unruly but powerful credit institutions unrestrained by CBI regulations and promising sky-high interest on deposits.

 Proportionality Factor

“It is important to determine just how much a bank is allowed to keep in the form of deposits, offer loans based on that and subsequently create new assets,” he said. “The amount of absorbed deposits must be proportional to the equity, size of the bank, how long it has been around, as well as the technical ability and the efficiency of its staff.”

When the deposit cap is in place and finally communicated, no bank will be allowed to accept deposits beyond the ceiling, which according to the official will create a backdrop within which “law-abiding banks” will be able to compete.

Heydari added that any bank that tries to attract resources by violating the interest rate cap set by the Money and Credit Council will be prosecuted. “Therefore it is in the interest of the banks to stick to the approved rates and operate within the confines of the devised deposit cap.”

 Less Risk

In his latest remarks, a former governor of the CBI also pointed to the central bank’s new plan to curb unhealthy competition among banks, noting its positive aspects.

“With the implementation of this plan, the banks will face fewer risks and find that their duties have been made simpler,” Tahmasb Mazaheri said in a talk with the Persian-language newspaper Farhikhtegan, banker.ir reported.

He believes the CBI is capable of devising a cap not just for the deposits but also for the amount of loans bank can or should offer. The scheme can be good for interest rates and “even prove to be helpful in reforming and improving the management of banks.”